The road to Utopia is the road to Hell. — Communism and socialism are the opiates of the intelligentsia. — The left, in its eternal and futile quest for "equality", is more than willing to abolish liberty and sunder fraternity.

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Economics from the Bottom Up

This is the sixth entry in a series of loosely connected posts on economics. Previous entries are here,here, here, here, and here.

NEEDS AND WANTS

What human beings want and what they need are popularly thought to be distinguishable things. Needs are said to be those things that sustain life: food (the minimum daily requirement, with no frills), clothing (just enough to protect us from the elements), and shelter (ditto). Wants are generally thought to be everything else.

But individuals vary in their perceptions of what they need; one person’s need is another person’s luxury. If a rich playboy “needs” a $300,000 Lamborghini, that’s for him to say. Accountants of the soul — moralists who believe that they know how the world should be ordered — will assert that the rich playboy can make do with a $10,000 Kia. But if that’s true, everyone can make do with a $10,000 Kia. And if that’s true, why not a bus token? (Only the older folks will remember those.)

Once the accountants of the soul are loosed, the people are allowed to need (or want) whatever the accountants of the soul approve. Except for those people who are in the good graces of the accountants of the soul. If you suspect that I’m alluding to places like the the former Soviet Union, the former German Democratic (sic) Republic, and the present Cuba and Venezuela, you’re right.

Given that “need” is a loaded word, I use the less-loaded “want.” Thus the rich playboy wants a $300,000 Lamborghini. Whether he needs it is not for economists or accountants of the soul to determine. It’s for the rich playboy to determine as he allocates his available income and wealth to competing products, services, and investment vehicles.

Wants are limitless. I may want a $300,000 Lamborghini (though I am not a rich playboy), a villa on the Mediterranean, and a collection of Rembrandts. Those wants lie far beyond my reach, and the reach of most human beings.

The main attribute of wants, other than their inherent limitlessness, is their vast variety and changeableness. Wants and their ordering can change from minute to minute, depending on what a person was doing a minute ago, what he happens to be doing now, where he happens to be doing it, the conditions in which he is doing it, who or what happens to impinge on his consciousness, how he is feeling (emotionally and physically), and so on. It takes free markets — not command economies run by soul-accountants — to respond to the vast variety and changeableness of wants.

TASTES AND PREFERENCES

A particular want is sometimes referred to as a taste. My taste for ice cream has persisted for more than seven decades. But I may, at various times, want different kinds of ice cream. And I may, at various times, prefer a certain ice cream to, say, chocolate cake, or vice versa.

To take another example, a middle-aged man may have only a residual taste for action movies; that is, he rarely wants to view one, given the alternative ways in which in can use his time and given his recently acquired taste for technical non-fiction books. Yet, twenty years earlier, when he had a strong taste for action movies, the now middle-aged man had no interest in technical non-fiction; it didn’t enter into his thoughts when he pondered whether to watch an action film or do something else.

If tastes represent the kinds of things wanted by a person, preferences are the order in which a person wishes to satisfy those tastes. Preferences, like tastes, change with time (often rapidly), and are also situation-dependent. For example, when I’ve finished eating a large bowl of chocolate ice cream, I’m likely to prefer a glass of cold root beer to another bowl of chocolate ice cream.

The preference for a glass of cold root beer rather than another bowl of ice cream doesn’t necessarily mean that the second bowl of ice cream would give me less satisfaction than the first bowl. It might or might not. But, in the circumstances, I would enjoy a glass of cold root beer more than another bowl of ice cream. (The concept of diminishing marginal utility may apply to particular things at particular times, but it is neither generally true nor a valid reason for redistributing income by force.)

UTILITY AND DEMAND

There are two classic microeconomic constructs that reduce wants, tastes, and preferences to discrete quantities: indifference curves and demand curves.

An indifference curve is said to depict the rate at which a consumer is willing to exchange units of product X for units of other products, while holding constant his level of satisfaction (utility) and his preferences (ordering of wants). Given the rapidity with which preferences can change, I see little utility in indifference curves — except as a pedagogic device.

A demand curve for X can be derived from indifference curves by showing how the amount of X preferred by the consumer varies with the price of X, where (at each price) the consumer chooses the mix of X and other economic goods that maximize his utility. (I use economic goods to stand for products — material items — and services, which require the use of material items but which aren’t material (e.g., a haircut, the use of a credit card to make a purchase).

But an individual’s wants, tastes, and preferences are fuzzy at any given time. So, an individual’s demand for X at any given time is fuzzy — and then it changes, in fuzzy ways.

The summation of all consumers’ demand curves for X yields, in theory, an aggregate or market demand for X at an instant in time — holding constant wants, preferences, income, and the prices of other goods. In other words, the demand for a given economic good is very fuzzy. It may be possible to estimate approximately the demand for a particular economic good for a brief period of time, though the approximation will necessarily come with a range of uncertainty.

SUPPLY: THE SATISFACTION OF WANTS

If demand is one blade of a scissor, supply is the other blade. By supply I mean the ways in which human beings contrive to satisfy at least some of their wants some of the time. Supply comes in three basic forms: individual action, cooperative behavior, and voluntary exchange.

Individual action is just that: what each of us does to satisfy his wants without the help of others, and without recourse to the exchange of one’s resources for the resources of others. Needless to say, individual action is limited mainly to Robinson Crusoe cases: situations in which a person must fend for himself, to the best of his ability and given the resources at hand.

Cooperative behavior is more relevant to the satisfaction of wants. It is the kind of behavior that wasn’t uncommon in the rural America of decades past, when each farm family operated as an economic unit. The combined efforts of a family — joined at times by neighbors — yielded shelter, food, and (sometimes) clothing, all of which were shared within the family.

To the extent that the family’s efforts failed to yield all of the kinds of food and clothing wanted by the family, it would then turn to voluntary exchange. It would trade some of its products (or labor) in order to acquire things that it could not produce or — this is a key point — could not produce as efficiently as another family or business. Voluntary exchange is of course today’s main mechanism for satisfying wants.

Voluntary exchange in a complex economy is a roundabout process, through which persons with marketable skills (e.g., real accountants) trade their services for monetary income, which enables them to choose from myriad products, services, and investment vehicles.

In the passage where he gets at the insight behind the notion that supply creates its own demand, Say writes: “it is production which opens a demand for products. . . . Thus the mere circumstance of the creation of one product immediately opens a vent for other products.” Put another way, Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production.

Can demand exist without supply? Only if the person who wants something but lacks the wherewithal to pay for it is able to finance his purchase in one of three lawful ways:

He may receive a gift of money. But that gift reduces the purchasing power of the giver, either directly as a subtraction from his income or indirectly as a subtraction from his wealth. So the net effect on the demand for all goods may be zero.

He may receive a subsidy from government. But the subsidy reduces the purchasing power of the persons who are compelled to finance it through taxes, or the purchasing power persons or companies who are able to borrow less because government borrowing (to finance the subsidy) displaces their borrowing.

He may receive credit, either from the seller or a third party. Credit usually will be extended on the basis of the borrower’s prospective future earnings.

The third case is the only one that clearly results in an additional demand for goods. And it is the one in which demand is financed by supply. Demand creates supply only when demand is financed by a claim on the demander’s future supply of economic goods. The ability of a creditor to finance demand rests ultimately on the creditor’s previous production (and sale) of economic goods.

The Keynesian proposition that demand can create supply of thin air, simply by throwing money at unemployed resources, is a fantasy perpetuated by mathematical trickery.

MEANINGLESS AGGREGATION

Are you better off, as a consumer, than you were 5, 10, or 15 years ago? That’s a question which only you can answer. And the answer won’t necessarily depend on your rate of spending today as compared with your rate of spending 5, 10, or 15 years ago. It will depend on how you — and only you — feel about the enjoyment that you derive from your expenditures.

Like you, A and B will derive different kinds and amounts of enjoyment the goods that they buy. And those different kinds and amounts of enjoyment cannot be summed because they are unique to A and to B, just as they are unique to you. If meaningful aggregation is impossible for A and B, how can it be possible for an economy that consists of millions of economic actors and an untold variety of goods and services? And how is it possible when technological change yields results such as this?

GDP, in other words, is nothing more than what it seems to be on the surface: an estimate of the dollar value of economic output. It is not a measure of “social welfare” because there is no such thing.

Comments & Correspondence

Comments close 30 days after the publication of a post. If a post is no longer open for comment, or if you prefer to communicate privately, you may e-mail me at the Germanic nickname for Friedrich followed by the last name of the great Austrian economist and Nobel laureate whose first name is Friedrich followed by the 3rd and 4th digits of his birth year followed by the usual typographic symbol followed by the domain and extension for Google’s e-mail service — all run together.

If you submit a comment or suggestion by e-mail, I may acknowledge it or use it on this blog. But I may paraphrase what you say or edit it for the sake of concision, clarity, coherence, or brevity. I will not use your name unless you specifically authorize me to do so. Even then, I will put quotation marks around your name unless I am certain of your identity.

On Liberty and Libertarianism

What is liberty? It is peaceful, willing coexistence and its concomitant: beneficially cooperative behavior.

John Stuart Mill opined that "the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others." But who determines whether an act is harmful or harmless? Acts deemed harmless by an individual are not harmless if they subvert the societal bonds of trust and self-restraint upon which liberty itself depends.

Which is not to say that all social regimes are regimes of liberty. Liberty requires voice -- the freedom to dissent -- and exit -- the freedom to choose one's neighbors and associates. Voice and exit depend, in turn, on the rule of law under a minimal state.

Liberty, because it is a social phenomenon and not an innate condition of humanity, must be won and preserved by an unflinching defense of a polity that fosters liberty through its norms, and the swift and certain administration of justice within that polity. The governments in and of the United States have long since ceased to foster liberty, but most Americans are captives in their own land and have no choice but to strive for the restoration of liberty, or something closer to it.

Who can restore liberty? Certainly not the self-proclaimed libertarians who are fixated on Mill's empty harm principle and align with the left on social norms. Traditional (i.e., Burkean) conservatism fosters the preservation and adherence of beneficial norms (e.g., the last six of the Ten Commandments). Thus, by necessity, the only true libertarianism is found in traditional conservatism. I am a traditional conservative, which makes me a libertarian -- a true one.

Notes about Usage

“State” (with a capital “S”) refers to one of the United States, and “States” refers to two or more of them. “State” and “States,” thus used, are proper nouns because they refer to a unique entity or entities: one or more of the United States, the union of which, under the terms and conditions stated in the Constitution, is the raison d’être for the nation. I reserve the uncapitalized word “state” for a government, or hierarchy of them, which exerts a monopoly of force within its boundaries.

Marriage, in the Western tradition, predates the state and legitimates the union of one man and one woman. As such, it is an institution that is vital to civil society and therefore to the enjoyment of liberty. The recognition of a more-or-less permanent homosexual pairing as a kind of marriage is both ill-advised and illegitimate. Such an arrangement is therefore a “marriage” (in quotation marks) or, more accurately, a homosexual cohabitation contract (HCC).

The words “liberal”, “progressive”, and their variants are usually enclosed in quotation marks (sneer quotes) because they refer to persons and movements whose statist policies are, in fact, destructive of liberty and progress. I sometimes italicize the words, just to reduce visual clutter.

I have reverted to the British style of punctuating in-line quotations, which I followed 40 years ago when I published a weekly newspaper. The British style is to enclose within quotation marks only (a) the punctuation that appears in quoted text or (b) the title of a work (e.g., a blog post) that is usually placed within quotation marks.

I have reverted because of the confusion and unsightliness caused by the American style. It calls for the placement of periods and commas within quotation marks, even if the periods and commas don’t occur in the quoted material or title. Also, if there is a question mark at the end of quoted material, it replaces the comma or period that might otherwise be placed there.

If I had continued to follow American style, I would have ended a sentence in a recent post with this:

What a hodge-podge. There’s no comma between the first two entries, and the sentence ends with an inappropriate question mark. With two titles ending in question marks, there was no way for me to avoid a series in which a comma is lacking. I could have avoided the sentence-ending question mark by recasting the list, but the items are listed chronologically, which is how they should be read.

This not only eliminates the hodge-podge, but is also more logical and accurate. All items are separated by commas, commas aren’t displaced by question marks, and the declarative sentence ends with a period instead of a question mark.